Dubai, DP World Sukuk to Gain as Accord Nears: Islamic Finance

The air traffic control tower stands at the Dubai World Central-Al Maktoum International airport. Photographer: Gabriela Maj/Bloomberg

July 26 (Bloomberg) -- Islamic bonds in Dubai are set to
extend this year’s rally as Dubai World predicted it will
complete debt restructuring in the “coming months,” said
Unicorn Investment Bank BSC and Emirates NBD Asset Management.

The average spread on securities that comply with religious
principles sold by Gulf Cooperation Council borrowers narrowed
six basis points to 545 percentage points on July 23, a day
after Dubai World announced the estimated timeframe for
renegotiating its debt, according to the HSBC/NASDAQ Dubai GCC
US Dollar Sukuk Index. The difference reached 647 points on Nov.
30 after the state-owned company said it will delay repayment of
its debt.

“Most sukuk investors have exposure to Dubai World, so
they’re obviously reacting in a positive way,” Nida Raza,
senior vice president of capital markets at Bahrain-based
Unicorn, said in a telephone interview on July 22 in Manama.
“People who were staying away from Dubai government bonds --
both conventional and Islamic -- are going to start buying more
and more of it.”

Dubai World, the state-owned corporation seeking to
renegotiate terms on $23.5 billion of liabilities, met with
about 70 banks last week after the company and its main group of
creditors agreed in May to alter terms on the debt. It said then
that banks would be paid $4.4 billion in five years and another
$10 billion over eight years at below-market interest rates
supported by asset sales.

Bodes Well

The terms accepted by the main banks were unchanged when
presented to other creditors, two people who attended the July
22 presentation said.

“As is customary at this stage of the process, this was an
informational session and no resolution was sought in the
meeting,” Dubai World said in an e-mailed statement. “Creditor
banks will now have the opportunity to review the information
provided before responding to the proposal.”

The average yield on Islamic bonds sold by Gulf Cooperation
Council borrowers dropped four basis points to 7.17 percent on
July 23, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk
Index. The rate reached 8.76 percent on Dec. 11.

The yield on the Dubai Department of Finance’s 6.396
percent sukuk due in November 2014 fell nine basis points to
7.38 percent on July 23, according to prices from Royal Bank of
Scotland Group Plc. The yield may drop to 6.4 percent by the end
of this year, Unicorn estimates. Investors would earn a return
of 6.1 percent should the forecast prove accurate, according to
data compiled by Bloomberg. The notes yielded 7.35 percent
today.

The difference in yield between the Dubai Department of
Finance’s sukuk and the Malaysian government’s 3.928 percent
Islamic note due June 2015 has widened 52 basis points since May
28 to 435 basis points, according to data compiled by Bloomberg.

“The Dubai government’s credit was suffering,” said Raza
at Unicorn, the ninth-largest underwriter of Islamic bonds this
year based on data compiled by Bloomberg. “People weren’t sure
if the government had the money to pay the debts off. Now that
the companies are slowly working their problems out, it bodes
well in terms of sentiment for the Dubai government bond.”

Nakheel Talks

Dubai World said on May 20 it reached an agreement with its
main creditor group to restructure $14.4 billion of bank debt
and $8.9 billion of government liabilities as it seeks to
resolve a crisis that roiled global markets last year.

Real-estate unit Nakheel PJSC, which held a separate
meeting with its lenders on July 14, said a group of its
creditors negotiating on behalf of banks “unanimously
supported” a proposal on altering the terms on $10.5 billion of
loans and unpaid bills. Nakheel also expects to complete the
restructuring over the “coming months,” it said.

The yield on Nakheel’s 2.75 percent sukuk fell to 15.3
percent from 86 percent on March 24, when Dubai’s government
said it would support the company with $9.5 billion, according
to prices compiled by Bloomberg.

Dubai and its state-owned companies have racked up $109.3
billion of debt, according to International Monetary Fund
estimates, as the emirate transformed itself into a tourism,
trade and financial services hub. About $15.5 billion of that is
due this year, the IMF said.

More Restructuring

“The biggest hurdle that is preventing a sukuk or a bond
rally is that investors are expecting more debt restructurings
from the region,” Dubai-based Usman Ahmed, senior fund manager
at Emirates NBD Asset Management, a unit of Emirates NBD PJSC,
the United Arab Emirates biggest lender by assets, said in an
interview yesterday. The unit oversees about $300 million of
fixed-income assets.

“How other entities resolve their debt problems combined
with increased global risk appetite should set the pace for a
future bond rally,” Ahmed said.

Gulf issuers sold $2.5 billion of Islamic notes so far in
2010, down 23 percent from a year earlier, Bloomberg data show.
Islamic securities returned 7.4 percent, according to the
HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing
markets gained 9 percent over the same period, according to JP
Morgan Chase & Co.’s EMBI Global Diversified Index.

DP World Favored

Dubai World controls DP World Ltd., the world’s fourth-biggest port operator, private equity firm Istithmar World PJSC
and Economic Zones World, an operator of business parks such as
Jebel Ali Free Zone. Istithmar bought New York luxury retailer
Barneys New York Inc. in 2007 for $942.3 million, while Dubai
World acquired a $5.1 billion stake in U.S. casino company MGM
Mirage in 2008.

The yield on DP World’s 6.25 percent Islamic notes due in
July 2017 declined 15.6 basis points to 8.4 percent today and is
down 24.6 basis points this month, according to prices from
Royal bank of Scotland Group Plc. The yield will decline to 8.25
percent in the next “couple of months,” said Raza of Unicorn.

“There is no question that Dubai will need to tap the debt
markets again in the near future,” Ahmad Alanani, an associate
director for the Middle East and North Africa at Exotix Ltd. in
London, an investment bank specializing in illiquid securities,
said in an e-mail on July 23. “The question is how receptive
will the market be to a new Dubai issue.”